Regulating the Crypto Space: It is Now or Never!

The Crypto and digital asset space started off with the launch of the first Bitcoin, within a decentralized, open-source network in 2009. Today, thirteen years later, the crypto market covers almost 9,000 digital currencies.

Undoubtedly, this space has been a solution to many financial problems, and is considered as the largest development that fintech has seen till now. In fact, cryptocurrencies have enhanced financial freedom, private ownership of funds and have also eliminated the need for an intermediary in money trading operations.

However, the extremely fast-paced sector, mixed with what the cryptocurrency market has gone through recently, including the sudden and immediate fall of the currency LUNA and the collapse and bankruptcy of the largest arms and companies in the field, calls for the immediate need for a clear regulatory framework. 

Regulating the space will definitely reassure the majority of crypto enthusiasts and investors, who have gone through great panic that continues to this day, in hopes of putting an end to the crypto winter and hopefully moving to a bright crypto summer.

Why regulate cryptocurrencies?

The necessity to regulate the field of cryptocurrencies and digital assets is crucial for many reasons. The most prominent are the following:

• To prevent market manipulation, protect investors, and expand their knowledge on cryptocurrencies. 

Market manipulation irregularities and price volatility are common phenomena in the cryptocurrency industry, which is why, the lack of authorized information about digital assets and the complex technological rules make it necessary to establish regulations to protect investors, who are the most important element in the field.

• To understand in depth the risks associated with this technology as it progresses and changes by the day. Given the rapid rate of technical change that accompanies it, there is a great need for information infrastructure and professional financial advisors skilled in cryptocurrencies. In this way, investors can understand the technological risks of cryptocurrencies, allowing them to make decisive and guaranteed decisions.

• To eliminate online scams and cybersecurity risks, as investing in cryptocurrencies is offset by the risk of online cyber fraud. While a single cyberattack can result in significant losses for investors who have put their savings into cryptocurrencies, in return, through regulations and laws, the authorities can implement measures to help these investors protect their assets. Also, legal safeguards can help investors overcome this fear by protecting them and recovering their investments in case of loss.

• To combat money laundering, any unregulated technology creates the ability to finance illegal acts. As a result, this risk requires a customer verification process known as “Know your customer.” This can help track investors’ real identities, verify their locations when buying or selling cryptocurrencies, and create official digital identities for them within the country, only if such technologies are regulated by official financial laws. Any violation of these standards should therefore be met with severe legal penalties.

In this regard, Jeetu Kataria, CEO of DIFX, told UNLOCK Blockchain, “The idea of blockchain started with the concept and belief of decentralization, an idea of giving power to the people and making information transparent! I am a firm believer that crypto & blockchain is key to helping a lot of issues faced around the world in terms of data, connectivity, and financial management.

For those of us in this space, regulations might be something that fundamentally goes against these principles, but I do think that with mass adoption becoming a clearer future, regulations are crucial to keep both organizations and users safe.”

He added, “As a CEO of a centralized exchange, I am very aware of the challenges faced in these regulatory landscapes, as they are constantly changing. In fact, there is a huge learning curve involved for both regulators and adopters alike to understand the true utility and solution of blockchain. One of the key fundamentals of blockchain is the ability to conduct cross-border transactions/information transfer without the use of an intermediary, hence, the very principle of decentralization.

In addition to crypto, various applications of blockchain like NFTs, DAOs, DeFi and tokenization, have also posed regulatory concerns over cross-border data flows, IP rights, capital controls and a taxation ambiguity. It would be naive to think that regulators can make a single set of rules for all these blockchain applications to abide by because they are just fundamentally different. Each of these blockchain applications must be carefully studied and understood in various environments and economies to create rules that fit different jurisdictions.

He concluded, “That being said, if we are looking at a volatile market like crypto, I believe more regulation could increase stability, provide clear guidance to companies so they can innovate in the crypto economy, protect long-term investors, and prevent fraudulent activity. Greater regulatory guidance, if well targeted, could help reduce speculation among crypto assets and furthermore protect the end users from fraud scams, rug pulls, and market manipulation. Maybe we could all get a break from the quarterly crypto theft and scam reports published and create a safer crypto ecosystem.”

Contrasting national approaches

It’s not that national authorities or international regulatory bodies have been inactive—in fact, a lot has been done. Some countries (such as Japan and Switzerland) have amended or introduced new legislation covering crypto assets and their service providers, while others (including the European Union, United Arab Emirates, United Kingdom, and United States) are at the drafting stage. But national authorities have, on the whole, taken very different approaches to regulatory policy for crypto assets.

At one extreme, authorities have prohibited the issuance or holding of crypto assets by residents or the ability to transact in them or use them for certain purposes, such as payments. At the other extreme, some countries have been much more welcoming and even sought to woo companies to develop markets in these assets. The resulting fragmented global response neither assures a level playing field nor guards against a race to the bottom as crypto actors migrate to the friendliest jurisdictions with the least regulatory rigor—while remaining accessible to anyone with internet access.

The international regulatory community has not been sitting idle either. In the early years, the major concern was preserving financial integrity by minimizing the use of crypto assets to facilitate money laundering and other illegal transactions. The Financial Action Task Force moved quickly to provide a global framework for all virtual asset service providers. The International Organization of Securities Commissions (IOSCO) also issued regulatory guidance on crypto exchanges. But it was the announcement of Libra, touted as a “global stablecoin,” that grabbed the world’s attention and added a greater impetus to these efforts.

The Financial Stability Board began monitoring crypto asset markets; released a set of principles to guide the regulatory treatment of global stablecoins; and is now developing guidance for the broader range of crypto assets, including unbacked crypto assets. Other standard-setters are following suit, with work on the application of principles for financial market infrastructures to systemically important stablecoin arrangements (Committee on Payments and Market Infrastructures and IOSCO) and on the prudential treatment of banks’ exposures to crypto assets (Basel Committee on Banking Supervision).

The regulatory fabric is being woven, and a pattern is expected to emerge. But the worry is that the longer this takes, the more national authorities will get locked into differing regulatory frameworks. This is why the IMF is calling for a global response that is (1) coordinated, so it can fill the regulatory gaps that arise from inherently cross-sector and cross-border issuance and ensure a level playing field; (2) consistent, so it aligns with mainstream regulatory approaches across the activity and risk spectrum; and (3) comprehensive, so it covers all actors and all aspects of the crypto ecosystem.

A global regulatory framework will bring order to the markets, help instill consumer confidence, lay out the limits of what is permissible, and provide a safe space for useful innovation to continue.

Is regulating cryptocurrencies the same as regulating Blockchain technology?

While talking about the regulation of the cryptocurrency space, it is necessary to address the extent to which it is related to that of Blockchain technology, which is the basic network on which currency transactions and digital assets are based and recorded. 

Naturally, the cryptocurrency and blockchain sectors cannot be regulated by the same regulations, but these sectors are intertwined, and digital currencies rely mainly on the blockchain network to complete all transactions. 

This leads to very important questions: would cryptocurrencies have existed without the existence of blockchain? Will countries and regulators globally regulate blockchain first, exclusively regulate digital currencies or combine the regulation of the two sectors? 

Only time will tell, but one thing for sure is that the sector is moving at a very fast pace, and regulations need to be put in place to ensure a secure and fair digital environment.